EDUCATION CENTER
INTERACTIVE: 3RD QUARTER, 2010 FREE CONFERENCE CALLS & PODCASTS

Sept. 2, 2010 Podcast
Click here for wmv file - Windows Media Video file (106MB, 85:00 length).
Windows Media 9 or higher version needed to view the recorded meeting
Includes video with Green's unedited notes made for this call.
Working on mp3 version soon.

Subject: New CFTC forex trading rules were released on Aug. 30.
New blog articles on this subject:
Sep 01 10 - Can American off-exchange retail forex traders evade strict new CFTC rules by trading on offshore platforms?
Aug 31 10 - New CFTC forex trading rules call for 50:1 leverage.
Forbes version.

Aug. 12, 2010 Podcast
Click here for Windows Media Player file (103MB, 75:00 length).
Includes video with Green's unedited notes made for this call.

Subject: Forex trading after Dodd-Frank Fin Reg and expected new CFTC rules soon.
Click here to read our invitation for this call, including this week's blog on the subject.
Our special additional guest was Charlie Delano, Director of Government Affairs for FXCM.

Facebook testimonials on this podcast:
"Terrific session! This was the best session I've listened to so far, especially since it was concerned with the most important forex issue we have faced in many years and probably will face for many more years. Keep up the good work and keep the info coming."

"Good session today. Great commentary and perspective. Thanks!"

With the help of three attorneys plus special guest Charlie Delano of FXCM, Robert Green dissects the Dodd-Frank Fin Reg bill and how it puts shotgun-type pressure on the CFTC to finalize its proposed draconian regulations for forex traders by the Oct. 19 deadline. If the CFTC doesn’t act on time, will non-eligible contract participants (small retail traders) be barred from trading in the U.S.? Will American forex traders be able to trade with better leverage and perhaps more lax regulations on foreign platforms? Maybe not.

This Webcast is a must-listen for all forex traders, brokers and others in the forex and futures industry. Like it or not, regulatory change is coming hard and fast to forex and other off-exchange derivatives and you better be ready for it.

Green starts off this Webcast explaining the big-picture concerns of forex traders and he drills down on the legislative details in Dodd-Frank, specifically Section 742 “Retail Commodity Transactions” (which includes forex and swaps) and Section 929Y on “extraterritorial study” and powers.

Much in Dodd-Frank Fin Reg is left to interpretation by regulators and how those regulators will act is not yet known. Will the CFTC promulgate its January 2010 proposed rules or will it heed the advice from the industry to soften its draconian changes, including changing leverage to 10:1 from 100:1?

Our team connects the dots between these various initiatives and bills to try to clear up popular misconceptions in the marketplace. We tie together Dodd Frank Fin Reg, the CFTC’s proposed rules published in January, the CFTC Reauthorization Act of 2008 (CRA or Farm Bill), the Over-the-Counter Derivatives Markets Act of 2009 and CFTC Commissioner’s “Gensler Letter” from August 2009.

CFTC Commissioner Gensler asked Congress for authority to regulate “the entire marketplace without exception.” He asked Congress to broaden the CRA’s “Zelener fraud fix,” preventing forex companies from evading regulation. There’s been confusion over the years about whether forex is truly a “spot” transaction that may be exempt from regulation, or if forex acts more like a swap trading transaction; the Gensler Letter describes it as “futures look-alike.” Retail forex brokers don’t really offer true spot transactions where traders take physical delivery; instead, traders rollover transactions. This confusion is settled in Dodd-Frank where off-exchange retail forex is included in Section 742 “retail commodity transactions” and they are regulated by the CFTC, a responsibility granted to the CFTC in CRA.

We define “eligible contract participants” (ECPs) mentioned in Dodd-Frank and explain how ECPs may be spared some (but not all) of the pending forex regulations. Even ECPs are expected to be subject to new (perhaps draconian) leverage rules. But ECPs aren’t prohibited from trading after the deadline if the CFTC doesn’t act on time.We discuss the pros and cons of forex traders joining forces in proprietary trading firms — set up onshore and offshore — which may qualify as ECPs for perhaps some better treatment.

One of the most important discussions we have throughout this Webcast is whether or not American forex traders can seek refuge from the CFTC’s new regulations by trading forex on foreign platforms. We address the pluses and minuses of forming personal tax and regulatory vehicles abroad to trade foreign markets. It’s fully taxable and reportable in the U.S. and your state, but will it provide regulatory relief?

As part of the foreign platform discussion, our special guest tax attorney explains the CFTC’s process for granting approval to foreign-futures exchanges like the German DAX. Foreign exchanges need this permission in order to market their futures trading instruments to Americans. Foreign-futures exchanges apply to the CFTC to receive this permission, and if granted, the CFTC issues a 30.10 approval letter. Approval is based on the foreign exchange having similar rules to American futures exchanges. The key question: How similar must it be? Will the CFTC grant approval to a foreign platform offering 200:1 forex leverage if it limits U.S. forex leverage to 10:1?

Finally, our team explores how the CFTC foreign-approval process may be forged with off-exchange trading, since the approval process applies to “qualified boards of exchange” only. Hopefully the CFTC will grant approval to foreign regulators for monitoring foreign off-exchange trading platforms. But how similar must their rules be to American rules?

This extraterritorial area is highly uncertain at this time, yet it’s of paramount importance to forex traders. We explain the history of the CFTC and other regulators in applying extraterritorial powers, including how it’s been recently applied with onerous new bank regulations applicable to foreign banks doing business with Americans. Plus, we discuss the IRS and U.S. Treasury’s recent highly publicized efforts to rein in Americans cheating on their taxes with hidden offshore bank accounts (like UBS). Forex traders must report foreign-platform transactions on foreign bank account reports (TDF 90.22-1) as well as the forex trading income or loss on their income tax returns. These tax forms will alert the Treasury, who might provide this information to the CFTC. The CFTC will most likely take action; it could possibly seek to block Americans from this offshore trading.

Delano concludes the call by saying it’s not time to panic yet, but it is time to get as informed as possible. We need the CFTC to act soon and learn the rules of the road. Otherwise, there’s too much uncertainty. Let’s hope for the best and be ready for the worst.

Aug. 5, 2010 Podcast
Click here for mp3 file (streams quickly).

Green discusses how the Dodd-Frank Fin Reg bill affects forex trading, prop trading and other issues of importance to traders.

Forex traders: Congress took a new approach with the CFTC in the Dodd-Frank bill. The CFTC was dragging its feet on Congress's 2008 Farm Bill calling for forex regulation, which had been mostly overlooked by regulators for decades. With Dodd-Frank, retail forex trading will become illegal for non-participants (traders) unless the CFTC finishes its new forex regulations in short order (Dodd-Frank Bill Section 742(c)). The comment period on the CFTC proposals published in January, 2010 expired and Green expects rules to be published soon.

We imagine the CFTC will drastically reduce allowable forex leverage from existing 100:1 to a significantly lower amount, but perhaps not as far as its proposed rule change of 10:1 leverage. Will American forex traders be able to continue using foreign trading platforms to escape the reach of Fin Reg and the CFTC (including these new rules)? Green discussed the WSJ article "Financial Bill Could Set The Stage For Uneven Retail Forex Rules" dated July 30, 2010. You can follow the progress of these regulatory changes here.

Dodd-Frank Section 742(c) has two areas of concern. It updates the Commodity Exchange Act (CEA) Section 2(c)(2)(D) Spot Commodities (Metals) and Section 2(c)(2)(E) Spot Forex. Google these sections to learn more.

Proprietary traders: Green gave an update on his prop trading firm alert story covered on his blog (FINRA's notice to prop traders) dated June 22, 2010. Goldman Sachs told one of the largest prop trading firms to change its payouts to prop traders to 80 percent or less, down from 100 percent. FINRA Regulatory Notice 10-18 said that 100 percent payouts were indicative of “beneficial owners” (disguised customer accounts and these firms are not registered customer-account broker dealers). Goldman seems to be closely following all rules now to stay out of trouble with the SEC.

Q&A:
Trader tax status, mark-to-market accounting and entities.

Update on the SE tax loophole for investment managers. Recent Republican filibusters blocked repeal of this tax loophole from current jobs and tax extender bills. Green explains how investment managers use S-Corps to reduce SE tax. He further explains how it's the reverse effect for traders.

Should prop traders join prop trading LLC-firms as an entity member or as an individual? Green points out how using an entity can be better for legal protection and better for tax reasons too - unlocking the opportunity for AGI deductions (retirement and health insurance premiums).

Foreign trading to escape Fin Reg and tax implications.

Commentary from Green sprinkled in to Q&A.

Brent Gillett on new English-version Form ADVs.

July 29, 2010 Podcast
Click here for mp3 file (streams quickly).

Q&A format and no commentary.

We covered forex tax treatment and elections, proposed rules to reduce forex leverage to 10:1, trader tax status and business treatment, IRA conversions and trading in retirement plans, Section 475 MTM elections, dealer versus trader status, and more.

July 22, 2010 Podcast
Click here for mp3 file (streams quickly).
The sound is a little better on the Windows Media Player file.

00:00 – 05:30: Fin Reg changes for hedge funds.
Fin Reg bill includes changes for hedge funds and investment-management businesses. The accredited investor rule is changed to disallow a primary residence in the $1 million net worth standard and this change takes effect on date of passage (July 21, 2010). Existing investors are not affected unless they add capital like a new investor. The bill closes the biggest loophole to registration: the “private adviser” exemption. Managers are given one year to register. Generally, the Financial Bill requires all investment advisers to hedge funds and/or private equity funds that manage $150 million or more in assets to register with the SEC. Form ADVs need plain English going forward too.

05:30 – 08:10: Fin Reg makes it clear that swaps don't qualify for 60/40 tax treatment.
Fin Reg calls for derivates contracts to be cleared on futures exchanges, but Congress doesn’t change their tax treatment to lower 60/40 tax rates. Fin Reg moves many derivative contractors from the private marketplace to clearing on futures exchanges. In Section 1601 of the bill, Congress makes it crystal clear this movement isn't like trading and it doesn't afford these derivatives contracts the regulated futures contract tax treatment in Section 1256. See Green’s blog on this topic.

08:20 – 17:25: Tax changes coming.
Question on the Jobless Bill passage. Wasn’t the S-Corp SE tax dropped from the bill and could it come back? Green answers: The S-Corp SE tax loophole repeal was dropped from the bill but it could come back in a proposal soon.

Green discusses recent tax-change negotiations and intrigue in Congress and he gives his opinion on how these changes may work out for taxpayers. Green discusses the Bush tax cuts expiring, proposed bank taxes, proposed carried-interest repeal, the end of cap and tax, and more. The maneuvering is intense and Green thinks gridlock will happen and Bush tax cuts may go up for everyone, not just the rich. Commentary from Green about the tax-class wars and private vs. government benefits and the need for government benefit cuts.

17:25 – 20:45: Fin Reg’s affect on taxes.
Question: Does Fin Reg affect forex taxes? Green answers no and explains that Fin Reg is not a tax bill but it does pass on wind-down costs to the big-banks in the form of bank taxes or levies.

20:45 – 23:52: Beefed-up 1099 reporting in the health-care bill goes too far.
Green explains there were complaints from gold coin dealers this week about the new draconian 1099 reporting rules which are included in the health-care bill. Green says the government has gone too far in distrusting small business with this type of “catch-the-cheat” 1099 reporting and other regulations. 1099 reporting is a burden to business, and it’s expensive and time-consuming. Green finds this trend troubling.

23:52 – 27:45: Fin Reg also goes too far and it’s going to be counter-productive.
Why were Fannie and Freddie left out of Fin Reg reform and why are government managers who missed the last crisis being rewarded with this reform? Green discusses several of the points in his blog article from July 21, 2010.

27:45 – 30:45: Update on forex leverage rules and how Fin Reg fits in.
Any news on the CFTC proposals to reduce leverage on forex trading from 100:1 to 10:1? No conclusion to the proposals yet. Green is guessing that many proposals were put on the back-burner waiting will be sorted out now that Fin Reg has passed. It will take some time.

30:45 – 38:00: Will regulators water-down Fin Reg in codifying the bill?
Brent Gillett JD discusses the new rules for hedge funds and prop trading and how regulators may water-down some of the draconian language. Green discusses how Fin Reg has a long phase-in period for the Volcker rule and how Congress may back-track on hampering U.S. banks in competition against universal-banking in Europe and Asia – where they will not adopt similar rules.

Green gives more commentary about the problems with Fin Reg, the mirage of “too big to fail," how Fin Reg can actually cause a run on the bank and contagion and more.

38:00 – 43:36: Fin Reg changes to the accredited investor rules.
Gillett discusses how the accredited investor changes will change over time and if it will slow down the hedge-fund industry. Gillett discusses accredited investors vs. non-accredited investors and more. Brokers have a fiduciary duty now and they often sell hedge-fund investments too.

Managers need to contact their legal counsel immediately to change their documents for the new accredited investor rules, which apply from day one. They also need to start planning for registration by July 21, 2011.

State registration rules for investment managers and funds are changing fast too. Will states adopt some of Fin Reg changes?

43: 40 – 50:00: Government mistakes or trial and error?
Caller comments on government mistakes like repealing Glass-Steagall and Fannie and Freddie. Green gives commentary and suggests smaller trial-and-error rather than major reform agendas.

50:00 – 58:50: Proprietary trading firm update.
Question: What is the proper way to join a prop trading firm? Green comments about the industry and discusses his recent blog article updates on the subject. Prop trading is a growth industry around the world and prop traders are leaving U.S. banks to join these firms.

58:50 – 1:01:25: The legal risks in joining a prop trading firm.
Brent Gillett JD discusses the legal side. Green gives an update on problems and alerts to the industry.

1:01:27 – 1:05:15: Small hedge-fund registrations after Fin Reg?
Question: Do small hedge funds need to register in Fin Reg? Gillett answers and gives an overview of registration on the federal vs. state level. It can vary greatly by state. Gillett discusses the rules in GA and other states too.

1:05:16: Will states get more aggressive after Fin Reg too?
Gillett answers. More states are moving away from the de minimus rule. Many states are in a period of flux and they could become more aggressive in their interpretations of SEC rules including Fin Reg. Managers should receive advanced notice. Gillett talks about Colorado and other states.

Green wonders about state budgets, requests for user fees and more. Gillett thinks it's reasonable and not a big worry yet. Green thinks states could get tough and seek user fees and taxes from hedge fund managers. That seems to be a negative trend.

National vs. state rules are always a concern for businesses. Blue-sky state law is very important in hedge funds and Gillett is very experienced in this area.

July 15, 2010 Podcast
Click here for mp3 file (streams quickly).

Green discusses passage of the Fin Reg bill today and how investment managers, traders and bankers should navigate and live with the new rules. There is more regulation for hedge funds which means more compliance costs, transparency and oversight. Due to even more restrictions at banks – limiting hedge funds to 3 percent of capital – there are also more opportunities for hedge-fund entrepreneurs to expand. Hedge funds escaped many bank fees/taxes in the last minute of Fin Reg deal making, including increased FDIC levies (which only apply to FDIC banks).

Hedge funds. The following are excerpts from Bloomberg and Green discussed these points with his own take on things.

• Any firm with $150 million or more in assets must register under the new rules. Larger hedge funds can’t use prior exemptions to avoid registration. Registration subjects funds to periodic inspections by SEC examiners. Funds also must hire a chief compliance officer and set up policies to avoid conflicts of interest. Hedge and private-equity funds will be required to report information to the SEC about their trades and portfolios that is “necessary for the purpose of assessing systemic risk posed by a private fund.”
  
  
• Registration rules may cost hedge funds as much as $500 million in the first year. The estimate is based on 2,000 new registrants and reflects the cost of implementing necessary compliance procedures. That’s expensive. Should the government determine a fund has grown too large or is too risky, it would be placed under Fed supervision. Restrictions on banks’ ability to own hedge and private-equity funds and trade for their own accounts may benefit the funds that are subject to less regulation. The bill could push new investment and trading talent toward the industry. Limits on leverage and stiffer capital requirements for banks may also give hedge and private-equity funds an edge landing investors chasing bigger returns. –Robert Schmidt.

Fin Reg’s wind-down procedures are scary in my view, as I wrote about on my blog earlier. Managers of covered institutions are subject to many risks, just like in a private partnership, except they are not partners who can control risk in that type of capacity. Fin Reg has the power to claw-back compensation and recover other losses from managers. Are bankers crazy for staying at banks with this type of personal risk? Many should leave for hedge funds.

Impact on traders: Some derivatives are moving to exchanges. Can traders enter this derivatives exchange-traded marketplace? It might be an opportunity.

Will the Bush tax cuts be extended? Green gives his take on how this may pan out.

Little Q&A.